A little update:

Yesterday uninstalled python (apt-get remove python) which turned out to remove 
tons of other stuff as well. 
After reboot, I now invariably get the "ubuntu running in low graphics mode" 
error. But when I do a login in via console, and then run startx, my desktop is 
perfecly normal and my "apperance settings" bug is gone!  I even get the 
hibernate/suspend option back when i logout which was also missing before.

So in effect, it seems I have traded one problem for another, but this is 
certainly much better. It's only a minor
nuisance to do the console login + startx myself.

Currently I'm manually reinstalling packages (using "apt-cache rdepends
python") so hopefully I will encounter the package that is the cause of
these problems.

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Appearance settings do not work in Xubuntu 10.10 RC
https://bugs.launchpad.net/bugs/652731
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